CRM Rises 8% on FYQ4: Pay Up for Growth, Say Bulls

By Tiernan Ray

Shares of Salesforce.com (CRM) are up $11.84, or 8%, at $157.74 after the company last night reportedfiscal Q3 revenue and profit per share that topped analysts’ estimates, projected this quarter’s results below consensus, and forecast fiscal 2014 revenue a slightly below expectations as well.

Salesforce’s performance is giving a slight lift to competitors such as Netsuite (N) and Cornerstone OnDemand (CSOD), with the former up 2% and the latter up 3%.

There are no ratings changes, that I can see, but there are some modest increases in estimates for the company, and most price targets seem to be staying pat at this point.

The bulls are out in force this morning, arguing that top-line growth is pretty much all that matters, in an environment where corporate spending has been tight of late. The bulls expect investors to continue to pay up for the shares despite a hefty price tag:

Rick Sherlund with Nomura Equity Researchtoday reiterates a Buy rating on the stock and a $160 price target, writing that the most important thing was billings growth, which shows the company is seeing “no impact from the upcoming fiscal cliff and the associated slowing capital spending environment”:

Salesforce reported 3Q’12 billings of $743mn, up 31% y/y, compared with the consensus expectation of $736mn (up 30% y/y). Adjusting for a shift in billing terms (annual versus quarterly or monthly billings) and large multi-year deals, the adjusted billings growth was up a strong 33%.

Though the stock is “priced for perfection,” at 32 times enterprise value as a measured of unleveled free cash flow in 2013, nevertheless, he expects investors will continue to pay up for Salesforce’s billings growth:

Investors favor high billings growth and market share expansion in the fast growing SaaS market. We remain buyers of the stock and continue to like the shares into the seasonally strong fiscal (Jan) Q4.

Pacific Crest’s Brendan Barnicle reiterates an Outperform rating on the shares, and a $200 price target, writing that with a total addressable market of $100 billion, “there is still plenty of upside,” in his view, allowing the company to continue to increase sales at better than 30%. (This year’s Street consensus is 34% revenue growth, while next year’s is 26%.)

Barnicle thinks management did a good job handling investor fears about billings growth this quarter, which was a big concern, he writes, going into the call:

Coming into the call, one of our biggest concerns was how management would discuss the FQ4 billings, which face a difficult comparison. Despite the difficult comparison, management still expects middle to high 20% growth, which underscores its 30%-plus normalized growth. Man- agement also noted that its deferred revenue assumptions did not include as large a benefit from its move to annual billing as it saw last year, and it is not assuming any large deals that will be recognized in deferred revenue, like its HP deal from last year. So, while we are lowering our billings estimate to $1.32 billion from $1.34 billion, we are still expecting over 21% growth. Furthermore, for the next several years, the company’s deferred revenue will continue to get a benefit from the move to annual billings, but at a smaller rate than over the past four quarters. Several critics of CRM had suggested that the move to annual billings was a one-time trick that the company had used to hide slowing growth, which is clearly incorrect.

Barnicle raised his estimate for fiscal 2014 to $3.84 billion and $2 per share in adjusted profit, and $4.06 per share in free cash flow, from a prior estimate of $3.71 billion, $1.99 per share and $3.91.

Likewise, William Blair’s Laura Lederman, who has an Outperform rating on the shares, thinks investors were aware that the Street estimates for this quarter were too high to begin with:

Using the high end of revenue guidance and the deferred revenue guidance range (“mid‐to‐high‐20% range”), reported billings are expected to increase about 15% to 21%—the year‐ago quarter increased 57% (35% after adjusting for longer invoice duration and a large multiyear invoice). Prior to the call, the Street mean was 21%; we believe that investors were aware that the consensus number was too high going into the earnings call. We now estimate 18% billings growth.

Like the others, Davis emphasizes what he sees as the impressiveness of top line growth, and says this quarter’s projection, which was a little bit less than the Street was modeling, is very good considering the fiscal cliff, the macroeconomic environment, etc.:

Do not underestimate Salesforce’s achievements. The fact is that delivering 25%+ revenue growth when a company is generating more than $3 billion in revenues is unprecedented in business software. Furthermore, we see multiple reasons why Salesforce’s layered growth strategy will deliver 20%+ CAGR revenue growth for the next half decade or more. When it comes to the stock, the key, in our opinion, will be a combination of consistent execution, transparency with regard to giving investors understanding of “how the gears fit together,” and attacking a large market. In our view, Salesforce, while obviously not being perfect, is delivering in the top 1% of all of the 500+ software companies we keep up with. To us, premium execution deserves premium valuation. In our opinion, Salesforce is valued slightly below average compared to this likely execution. Results in-line or better than expected across the board. There really wasn’t anything in this quarter that stood out as particularly mind blowing or disconcerting. In-line guidance to be expected. Yes, Salesforce is executing extremely well, but the reality is that the environment is choppy – companies are facing a world economy with Europe kicking the can down the road, the U.S. Congress wrestling with a wholly self-inflicted Fiscal Cliff, and China’s deceleration is echoing across Asia and beyond. Mega-deals, those multi-million-dollar ones, are understandably more difficult to close. Salesforce was not especially hurt by the turbulence, but we had zero expectation of a big guidance raise off of this quarter.

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There are 9 comments

NOVEMBER 21, 2012 1:19 P.M.

timothy wrote:

NEVER short salesforce !
They have not made a dime and still stock rises sarply!
LOOK at the real numbers folks...
JUST avoid all together , the day of revesal will never
come ( just like green mountain )

NOVEMBER 21, 2012 1:34 P.M.

VARINVEST wrote:

O you even forgot netflix, the whole market will soon come down significantly.

NOVEMBER 21, 2012 1:46 P.M.

Anonymous wrote:

There are always better buying opportunites for stocks selling at these extreme valuation metrics.

NOVEMBER 21, 2012 2:52 P.M.

Cindy wrote:

Seriously-all of the above noted analysts should be fired. Employee stock options ADDING to free cash flow. Morons from third rate firms.

NOVEMBER 21, 2012 3:51 P.M.

Anonymous wrote:

It just shows you how ridiuclous the stock market and financial markets have become.

NOVEMBER 21, 2012 4:43 P.M.

BigDog wrote:

Billings up 30%, sales and marketing cost up 40% and stock option costs up close to 100%. Unprecedented my behind. These analysts are lemmings, and this one is going to halve at some point, it's clear and easy to see. Timing is the only hard bit, when the mgt and the cheerleaders have run out of runway, this one should be fun...

NOVEMBER 22, 2012 10:24 A.M.

free stocks for insiders wrote:

Salesforce.com has given away 12 million shares over the last 18 months. The stock price has not increased in 18 months. Take a look where the price was 18 months ago. So salesforce.com numbers have gotten worse, insiders are getting rich off of investors money.

The grow over the last year was bumped from changes in invoicing period.

Free cash flow has dropped. If they hit their numbers next year, big if, they will be trading at 922 times earnings. They will be giving away million more shares this coming year.

This stock is way over valued.

NOVEMBER 22, 2012 10:31 A.M.

@timothy wrote:

The price does not keep going up. 18 months ago price was 160. So how much has it appreciated over 18 months?

How long has fidelity been sitting on 20 million shares?

Salesforce has given away over 10 million shares over that same time. That should piss off investors.

NOVEMBER 24, 2012 5:35 P.M.

Daniel Kim wrote:

Thank you for the empirical data!
SaaS/Cloud-based software are not only the future, but they are currently being utilized to optimize sales as well as moving towards an environmentally friendly and paperless industry. As a member of the GreenRope family, it is encouraging to see that cloud-based softwares are on the upswing and do not seem to be losing steam any time soon. Investments into such CRM software, is a step towards marketing and brand awareness domestically and internationally. This brilliant tool for sales, is not one dimensional and CRM integration can be used in all facets of business.
As technology advances, it would be wise to utilize and fully adopt a CRM software into a businesses daily routine.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.